Using the Madison Building in downtown Detroit as the model, a group of former Barracuda Networks Inc. executives wants to create a large hub for tech startups in downtown Ann Arbor.
They have signed a purchase agreement to buy two adjacent office buildings downtown and are negotiating to buy one or two more buildings. They hope to close on the first deal in about a month and have a build-out done in six months.
Pending the closing on the real estate sales, they declined to specify the specific location. But the premise of the idea is that startups in the area need a place to call home, and current options in downtown Ann Arbor are too hard to come by.
“Developers want you to sign a five-year lease, and for a startup, that makes no sense. In five years, you’ll either need four times the space, or you’ll already be dead,” said Joe Malcoun, CEO of Ann Arbor-based Nutshell Inc., who is one of the investors in the real estate project. “There are startups scattered around downtown, hidden in back offices on the third floor. They don’t know each other. There’s no sense of community,” said another investor, Nutshell co-founder Guy Suter. “They don’t want to be in office parks; they want to be downtown. They want to be able to walk to nice restaurants. We want to get them into one area and build a startup ecosystem that has density. We need a vibrant tech scene downtown.”
The investors say they will launch operations with at least 12,000 square feet and could have as much as 25,000, if two more buildings are bought. They say they will offer short-term leases that startups generally can’t find in the tight office market in downtown Ann Arbor, as well as services startups can share to reduce costs.
But the investors have already landed their first tenant: Coolhouse Labs, a tech incubator that was launched in downtown Harbor Springs in 2013. It will open up another incubator under that name in Ann Arbor, with plans to have eight to 12 startups taking space next January.
“We’re going to create a really high-end environment. We want this to be the Madison Building of downtown Ann Arbor,” said Malcoun, referring to the Dan Gilbert-owned building in the former Madison Theatre building that has become the focal point and poster child of the growing startup activity in downtown Detroit.
Nutshell, which offers customer relationship management services to help companies organize and manage sales leads, on desktops and through apps, was founded in 2011 by Suter and Lindsay Snider while both were high-ranking executives in Barracuda’s Ann Arbor office.
Snider was director of engineering, and Suter was head of the data storage unit called Barracuda Backup. They left Barracuda just before the company’s initial public offering in November 2013 to concentrate on Nutshell and another startup called LiftMail, a company still in beta testing that they hope will improve the way email is organized through the use of artificial intelligence.
Last August, they hired Malcoun, a former DTE Energy Co. executive, to be Nutshell’s CEO. Malcoun is a member of the Ann Arbor Angels and owns his own small venture capital firm, CKM Capital Partners, which has made investments in several local startups, including Avegant Corp. of Ann Arbor, LevelElevenof Detroit, Ablative Solutions Inc. of Kalamazoo, and AdAdaptive Inc. of Ann Arbor.
Suter, Snider and Ian Berry, a former lead engineer at Barracuda who is a co-founder and chief technology officer at LiftMail, joined with Malcoun to form a dba called Space to purchase downtown Ann Arbor office buildings to help grow the startup ecosystem.
Suter said he can’t disclose the formal name of the company’s LLC, because it would give away the location of the buildings under agreement. The total investment in the project also isn’t being disclosed, pending the real estate purchases.
“The Space name is a play on the heart of the issue as we see it — one of the things startups in Ann Arbor need most is simply access to office space downtown,” said Suter. “Our approach with Space will combine short-term leases with startup-friendly services. The idea is to remove barriers so entrepreneurs can get started quickly making stuff.
“This isn’t your typical commercial real estate project because its driving goal is to support our local entrepreneurs and help Ann Arbor’s startup ecosystem grow and gain national visibility. Space is a passion project,” he said.
Coolhouse Labs had five incubator companies in its first three-month summer session in 2013 and eight in its second session last summer. Its third session begins over the Memorial Day weekend.
Thanks to help from a national startup support organization called TechStars, Coolhouse founder Jordan Breighner has been able to recruit companies to the small town of Harbor Springs from London, San Francisco, Denver, Houston, Chicago, Philadelphia, New York, Toronto and Taipei, Taiwan.
For the first two groups, Breighner invested $25,000 in each company in exchange for 6 percent of equity and provided them with onsite design help.
He said six of the companies are still alive, with one in Michigan, Ann Arbor-based Localfu, a Web-based trip planner.
That may seem like a small survival rate, but the point was to fund good ideas and see whether they could evolve to the point that they could attract serious investment. From the start, Breighner said, he assumed a large failure rate.
Breighner said he will increase funding for the Ann Arbor companies to $50,000. He said companies can apply for entrance into the first class of startups at www.coolhouselabs.com, beginning about Labor Day.
Malcoun was a mentor for last summer’s crop of tenants at Coolhouse.
“Joe gave me a call in September and asked if I would be interested in doing something with him in Ann Arbor. It was a quick ‘yes,’ ” said Breighner.
Malcoun said the goal is to create a sense of community to entrepreneurs that can be found in some other tech centers, such as Austin, Texas, and Boulder, Colo.
And others who support the entrepreneur community say the new project will fill a gap.
“When you hear about two buildings being bought, you don’t think Ann Arbor,” said Ken Nisbet, associate vice president for research and director of technology transfer at the University of Michigan.
UM operates an 18,000-square-foot tech incubator called the Venture Accelerator at the school’s north campus complex.
It’s not space available to the public, and even many of its tenants would probably prefer a downtown location once they graduate from a need to be incubated, said Nisbet.
“This seems like a great development. People want to be downtown. They like to be able to congregate,” said Nisbet. “If they’re not asking top dollar, I’m sure they’ll find plenty of tenants, some of whom will make it and some of whom won’t, which is the way it works. But they’ll have plenty of available entrepreneurs.”
UM also manages a small incubator space for students that is downtown, called TechArb, which shares space under a parking structure with Menlo Innovations.
Another incubator, the Tech Brewery, is in the former Northern Brewery Building northeast of downtown.
“We still don’t have a national reputation for our startup ecosystem. Having an ecosystem here will help us recruit and retain employees and help us recruit companies,” he said.
